Investor Insights - May 2019

By Bobby Moyer, CFA, CFP®, CAIA

Bobby Moyer, CFA, CFP®, CAIA

Bobby Moyer, CFA, CFP®, CAIA Director of Research Senior Portfolio Manager

See our recap of April's key statistics and market commentary below. 

Noteworthy Numbers

investor-insights-numbers green 3.2 percent

The U.S. economy, as measured by GDP, grew 3.2% in Q1 compared with the same period last year. 3.2% surpassed the consensus expectation of 2.5% and drove markets higher.

 

investor-insights-numbers green 22.38 percentThe NASDAQ Composite is the top performing major index for both April (4.77%) and the year-to-date (22.38%).

  

investor-insights-numbers green 9.00 percentThe S&P 500 Financials sector was the top performing sector during April (9.00%) as the yield curve slightly steepened. Financials are positive by 18.34% year-to-date which, amazingly, is still only the fifth best performing sector.

 


Our Take

Equities continued to rip higher in April as the S&P 500 reached a new all-time high, effectively recouping all of the losses it incurred from September to December in 2018. The index earned 4.05% in the month as a lack of potential flashpoints, coupled with strong economic and corporate news, painted an encouraging picture for the rest of 2019. The market narrative is at somewhat of a turning point. For much of the year thus far, equity returns were largely attributable to the easing of fourth quarter concerns (interest rate hikes, trade war, slowing global growth) and the rebound that ensued following the Q4 selloff. Now that markets have recovered, returns going forward will need to be justified by new signs of growth. In April, several new signs of growth were poured into the hopper.

Starting with the most notable news for the market, it’s fair to say that the initial reading of Q1 GDP blew everyone out of the water. Coming in at 3.2% year-over-year growth, the actual number smashed the lukewarm expectations which averaged 2.5%. The GDP figure is an encouraging sign that economic growth in the U.S. may not be slowing after all. Included in the GDP report was the fact that disposable personal income grew by 3%, which indicates that household spending may increase going forward. The labor picture looked stronger as well in April. After a disappointing number in March (only 33 thousand jobs added), the U.S. beat expectations by adding 196 thousand jobs in the April release. Average wages, though underperforming the analyst forecast, still grew at a healthy 3.2% year-over-year rate. Inflation, as measured by the Core Personal Consumption Expenditures index, is higher than last year by 1.6%, which is below the Fed’s target of 2% and thus will continue to enable the Fed to hold rates steady.

Another bright spot in the U.S. economy was in the housing sector. While existing home sales continued to decline from their 12-month-prior levels, the number of existing homes sold in March increased by 3.8% from February, which beat analyst expectations. The increased activity in March was likely due in large part to the drop in interest rates—the average 30-year fixed mortgage was about 5% at the start of last November but is now closer to 4%. Lower interest rates likely brought more potential buyers to the marketplace while also increasing their purchasing power. Whether rates remain low enough to encourage future transactions remains to be seen, but at least for now there appears to be more confidence in the housing market than there was earlier this year.

Earnings season has also surpassed expectations so far. While the S&P 500 is still on track for a year-over-year decline in earnings of -2.3% (according to FactSet, as of April 26), this is better than the -3.9% decline that was forecasted as of April 19. The decline seems like a bigger negative than it really is—recall that last year’s earnings growth was consistently above 20% over comparable periods in 2017, but this was due in large part to the new tax act coming into effect and automatically boosting the numbers. Now, in 2019, we have more of an “apples to apples” comparison because the tax rates are the same. Expectations for the remainder of 2019 currently have another period of negative earnings in Q2 followed by low-single digits in Q3 and high single digits in Q4.

International markets posted strong returns in April, though not as strong as in the U.S. Developed markets outside the U.S. were positive by 2.81% for the month and 13.07% year-to-date. The EU agreed to extend the UK’s deadline on departing the European Union from April 12 to October 31. This is yet another extension that will provide breathing room for continued deal negotiations, but each new extension creates a new moral hazard and reduces the incentive for lawmakers to come to an agreement. Also in Europe, the European Central Bank kept interest rates unchanged and signaled that it could refrain from normalizing policy (in other words, refrain from significantly raising rates) through the remainder of this economic cycle.

While key sources of tension in the developed world were eased in April, Emerging Markets have been the primary driver in the recent pickup of global growth. The Global Current Activity Indicator (CAI) ticked up to 3.3% during the month and was due in large part to Emerging Markets, particularly China, which had a strong Q1 GDP release of 6.4% year-over-year, outpacing expectations. The MSCI EM index was positive by 2.11% in April and is up 12.33% year-to-date.

Interest rates rose modestly during April. After closing March at 2.41%, the 10-year U.S. Treasury Bill yield rose as high as 2.60% before settling at 2.51% to close the month. More notable than the movement of any one maturity was the general steepening of the curve that took place. Last month the yield curve inverted, with the yield on a 3-month bill higher than the yield on longer-dated bills like the above-mentioned 10-year. While the 3-month still sits higher than 2-year and 5-year marks, it’s encouraging to see the 10-year bill, which is driven more by inflation and growth expectations, edge higher. This is a good sign for the economy and more specifically the financial sector, much of which has a business model based on borrowing short-term money and lending long-term money. The rise in longer-dated yields did provide some headwinds to fixed income—the Bloomberg Barclays Aggregate Index finished April just slightly positive at 0.03%but bonds of all stripes are still on track for a good year overall.

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